The March issue of Multifamily Executive gives an interesting overview of the current multifamily market situation and takes a stab at a prediction for a rebound. According to the article entitled “Groundbreaking Ideas,” “Citing low labor and material costs, recovering fundamentals, and a dire lack of competitive market supply, the progressive multifamily mindset says construction will start now.”
Here’s how they plan to pull new developments out of the dirt for delivery in 2011 to 2013.
Before the downturn in residential development, Dallas-based Trammell Crow Residential had been producing an average 6,700 units of apartments annually. Last year, the company’s development came to a standstill—as the company broke ground on zero units in 2009, despite having 1,300 units in its pipeline. According to Charlie Brindell, president and CEO of Trammell Crow, “…we hoped to start but were unable to start principally due to a lack of construction and development financing. In the private markets, debt and equity simply have not been available at meaningful levels.”
And so the story goes. The mortgage debacle may have begun the landslide, which triggered the demise of the lending market, which trickled down to a lack of financing available to developers, which, as we well know, has put new development virtually on the skids. Essentially, the only types of new housing projects being planned or financed in today’s environment are HUD properties, REITs with lines of credit or access to public market equity and a sprinkle of developments viewed as less risky by lenders.
Denver-based UDR, a large multifamily REIT, has four projects underway in their active development pipeline, according to a recent press release, “comprising 1,575 apartment homes with an anticipated total cost of $264 million; roughly $24 million remains to be funded. These properties are expected to be completed in 2010 with the majority of the deliveries in the second half of the year.”
Tom Toomey, UDR's president and CEO stated, "The environment today is encouraging, as we have seen a bottoming of fundamentals. In the first quarter, we experienced positive sequential same-store revenue growth and we are seeing strong interest on the leasing side at our development and redevelopment properties.”
Projects funded by HUD and the ARRA have continued to contribute to the multifamily landscape and stimulate the local economy. Drahota is currently involved with three jobs in this sector, including the $13-million Provincetowne Townhomes, the Orchard Place HUD apartment renovation and the $27-million Prana apartment development. Orchard Place entails an extensive renovation to the existing Creekside Garden Apartments in north Loveland in conjunction with the Loveland Housing Authority.
The Housing Authority can use Tax Credit Exchange Program funds provided by the American Recovery & Reinvestment Act to renovate the 50 two- and three-bedroom apartments. The low-income housing and tax credit projects seem to be the most active in the region due to the lack of private financing.
Prana, the 254-unit apartment development, located in Lafayette and adjacent to the Exempla Good Samaritan Medical Center, is being developed by Ken Kiken of Milestone Development Group and funded by HUD’s 221 (d) (4) program. The market has been good for his rental apartment development process, unlike other multifamily developers.
“Because of our niche, it’s been the best two to three years. We’re a small company and only build one infill site at a time using in-house capital as a HUD partner. Lumber is at a 30-year low with low demand. Competition is down. Cities are willing to postpone or lower fees. The entitlement process is easier and land is accessible,” said Kiken. Yet he does not believe developers are out of the woods yet. “I don’t see us coming back to normalcy until 2012. The reality is it is really hard out there.”
The increase in publicly funded projects has helped to stimulate the local economy at some level. HUD is currently evaluating the Northern Colorado market for opportunities, but there is a strong possibility that not all projects will get the green light. For projects that do get the go-ahead, the market is prime for development because of low labor and material costs, accessibility of land parcels and limited and competitive mark up by contractors.
I believe 2011 will be unpredictable, due to the number of unforeseen obstacles and/or opportunities. With that said, we are forecasting a better 2010 by 30% to 40%. There’s a silver lining somewhere, and that may be that those tied to the development and building sector are banding together to make the best of these challenging times.